The three principles behind every answer
Your plan cannot transact with a disqualified person. The category covers you, your spouse, your lineal ascendants and descendants and their spouses, and any entity those people control. Siblings, cousins, and friends are outside it, and where the line falls determines the answer to every scenario below.
A company becomes a disqualified person in its own right when disqualified persons hold fifty percent or more of it, measured by voting power, share value, capital interest, or profits interest under IRC Section 4975(e)(2)(G). Below that line the company is not disqualified, but the people involved still are.
Effective control creates exposure even where the ownership math clears. A disqualified person running the company has continuous opportunity to move benefit between the business and the plan, and most tax attorneys advise against the investment on that basis regardless of the percentages.
The company is one you or your family own half or more of
Prohibited. Combined ownership by disqualified persons at fifty percent or more makes the company itself a disqualified person, and your plan cannot invest in a disqualified person. Ownership is aggregated across everyone in the category, so your thirty percent alongside your father's twenty-five percent reaches the threshold even though neither of you crosses it alone. Indirect ownership counts as well, including interests held through another entity.
You serve as an officer or director of the company
Avoid. Where the company is already disqualified through ownership, this is prohibited outright. Where it is not, the statute does not disqualify the company through your role alone, but the position gives you continuous authority over a business your plan has money in, which is exactly the situation the self-dealing rules under IRC Section 4975(c)(1)(E) are written to catch. Compensation decisions, contracts, distributions, and hiring all become transactions you influence on both sides. Most tax attorneys treat this as a place not to go.
You already work at the company in a non-executive role
Generally permitted. Employment at a company your plan invests in is not itself disqualifying, provided the company is not disqualified through ownership and you hold no authority position. Two conditions matter. Your employment should predate the investment, and the investment should not secure, protect, or improve your position there. An employee buying into a round on the same terms offered to outside investors, in a job held before the round existed, is on solid ground.
Two thresholds change this answer. Holding ten percent or more of the company's shares, or earning enough to count as a highly compensated employee, makes you a disqualified person with respect to that company under IRC Section 4975(e)(2)(H). At that point the analysis reverts to the officer and director scenario above.
You are planning to join the company or take a contract with it
Gray area. Get an attorney's opinion before investing. The concern is that the investment could be characterized as buying the position, which would deliver an indirect benefit to a disqualified person, prohibited under IRC Section 4975(c)(1)(D). The statute does not address this fact pattern directly, and the answer turns on details: whether the role was already offered, whether it exists independently of the investment, whether the compensation is at market, and how the two events sit in time relative to each other. This is a live question rather than a settled rule, and it deserves a written opinion from a tax attorney before the plan subscribes rather than an assumption either way.
The plan would buy shares from an existing shareholder
Prohibited when that shareholder is a disqualified person. A secondary purchase is a sale between the plan and the selling holder, which is a different transaction from subscribing to a new issue, and a sale between a plan and a disqualified person violates IRC Section 4975(c)(1)(A) regardless of price or terms. The rule is categorical, so paying fair market value does not fix it. Where the seller is unrelated to you, a secondary purchase is fine.
A sibling, friend, or business associate founded the company
Permitted. Siblings, cousins, aunts, uncles, friends, and business associates fall outside the disqualified person definition at IRC Section 4975(e)(2), so their involvement in a company does not restrict your plan. The standing caution still applies: confirm that no benefit flows from the transaction to you or anyone in the disqualified category, since a deal structured to route value toward a disqualified person is a problem regardless of who else is on the capitalization table.
Why this test comes first
The whole analysis runs on relationships rather than on the merits of the investment. A company can have excellent fundamentals, a strong team, and terms that favor your plan, and still be an investment your plan cannot make. The ownership and authority questions take minutes to answer, and answering them first saves the work that would otherwise go into evaluating a deal that was never available. The stakes reward that order: a prohibited transaction is among the costliest mistakes available in a self-directed account.